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Base Erosion - Profit Shifting (BEPS)

National tax laws have not kept pace with the globalisation of corporations and the advent of the digital economy, leaving gaps that may be used by multinational enterprises (MNEs) to artificially reduce their taxes. Published on July 2013, the OECD’s Action Plan on Base Erosion and Profit Shifting (BEPS) offers a holistic approach that would allow governments to collect tax revenue and address critical changes in international taxation. The OECD’s aim in setting out the Action Plan was to create a competitive tax environment for business, which at the same time would ensure that private companies contribute to their “fair share” of the tax burden.

 

The Action Plan recognised the importance of addressing the digital economy, which offers a borderless world of products and services that may not fall within the tax regime of any specific country, leaving loopholes that could allow profits to go untaxed. The Action Plan also developed a new set of standards to establish coherence of corporate income taxation, with the objective of neutralising the effects of hybrid mismatch arrangements and strengthening rules on controlled foreign companies which would allow countries to tax profits retained in offshore subsidiaries.

 

Domestic and international tax rules should relate to both income and the economic activity that generates it. Existing tax treaty and transfer pricing rules can, in some cases, facilitate the separation of taxable profits from the value-creating activities that generate them. The Action Plan aimed to restore the intended effects of these standards by aligning tax with substance – ensuring that taxable profits would not be artificially shifted, through the transfer of intangibles, risks or capital, away from countries where the value is created. Additionally, the Action Plan sought to prevent treaty abuse and to improve the existing definition of a “permanent establishment”. Furthermore, the report highlighted that greater transparency and improved data are needed to evaluate, and stop, the growing disconnection between the location where financial assets are created and investments take place and that where MNEs report profits for tax purposes.

 

The OECD has published comments and carried out several public consultations to address and delimit in detail each one of the 15 actions that the Action Plan proposed. A particular one (January 2014) to underline was concentrated on the tax challenges of the digital economy. On 14 March 2014, a discussion draft was released regarding Treaty Abuse (Action 6) and AIMA submitted comments in response (3 April 2014). On 19 March 2014 a further discussion draft was released in relation to the effects of hybrid mismatch arrangements (Action 2). AIMA in representing the industry interests submitted its response to the consultation on 1 May 2014. Comments received by the OECD on the discussion drafts are published on the organisation’s website. Some of the actions proposed remain to be evaluated by the OECD.

 

AIMA’s position in both consultations essentially emphasised that BEPS measures were drawn up with the activities of multinational corporations in mind, without due consideration of the potential effect on collective investment schemes. Some of the proposals relating to double tax treaties and hybrid financial arrangements would have direct and adverse consequences for the investment fund industry.

 

OECD documents

Comments on discussion drafts on Neutralise the Effects of Hybrid Mismatch Arrangements (7 May 2014)

Comments on discussion draft on Tax Challenges of the Digital Economy (16 April 2014)

Public comments on discussion draft on Action 6 (Prevent Treaty Abuse) of the BEPS Action Plan (11 April 2014)

OECD comments received on Tax Challenges of the Digital Economy (13 January 2014)

OECD comments received on Transfer Pricing Documentation (22 October 2013)

Action Plan on Base Erosion and Profit Shifting (19 July 2013)

Addressing Base Erosion and Profit Shifting (12 February 2013)

 

AIMA documents

AIMA consultation on Neutralise the Effects of Hybrid Mismatch Arrangements (1 May 2014)

UK priorities for the G20-OECD project for countering base erosion and profit shifting (BEPS) - AIMA Response - HM Treasury (8 April 2014)

AIMA consultation on Preventing Treaty Abuse (draft on Action 6)(3 April 2014)

 

Other documents

Skadden - "OECD Outlines Plans to Prevent Double-Tax Treaty Abuse" (20 March 2014)

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